Sarbanes Oxley Critics Declare a Victory — At Least for Now

Seven years later, critics of the Sarbanes Oxley law got a victory – at least for today.

A House panel agreed this morning, by voice vote, to permanently exempt small, publicly traded companies from a financial controls provision of the 2002 corporate governance law.

It’s not a done deal yet, but placing SOX in the crosshairs keeps the debate alive.

It could also stir up some friction between House Financial Services Committee leaders, who want to ditch the exclusion, and the Obama administration, which has indicated it wants to make it permanent.

At this morning’s session, two committee members mentioned that the Obama administration is onboard. “It’s odd that I should be defending the White House,” said Rep. Scott Garrett (R., N.J.), who introduced the amendment that would make permanent the small-company exemption that’s due to expire next year. “The White House understands the importance of going forward” with the amendment, he added.

House Financial Services Chairman Barney Frank (D., Mass.) opposed the amendment, and said he would seek a roll call vote when the panel votes on the entire investor protection bill Wednesday morning.

The SOX provision at issue — Section 404 — requires management of all companies to develop ways to monitor internal controls over financial reporting. It also requires outside auditors to attest to management’s assessment of its controls – something the amendment would drop for companies with market capitalization below $75 million.

Almost since the law’s passage, Section 404 has been a lightning rod for small companies. Compliance, they said, is too costly and siphons money from research and development budgets. Proponents say fraud is just as likely to occur at small companies as it is at large ones. The SEC adopted the small business exclusion, and has conducted studies on the cost of compliance.

Rep. John Adler, a New Jersey Democrat who supports the amendment, also chimed in that the White House and Treasury Department back the repeal.

That prompted Rep. Paul Kanjorski (D., Pa.), who said a permanent exemption would be a “bad day for the American investor,” to ask Adler to identify the administration folks with whom he had talked.

Adler said he discussed the matter three times with White House Chief of Staff Rahm Emanuel.

No word yet from the White House or Treasury Department.

UPDATE:Jen Psaki, deputy White House press secretary, said it is a “strong bill” and noted, “Our focus must be on addressing the threats posed to investors and consumers by large, interconnected companies rather than placing an undue burden on small businesses. We are working closely with Congress to determine the best vehicle for getting that accomplished.”

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